The development challenge facing Cambodia is
to sustain growth, reduce poverty, and accelerate the
completion of the reform agenda. To accomplish these medium
term goals will require effective economic management and
considerable inflows of external assistance in order to
support the implementation of public investment priorities
and raise the pace and consistency of structural reform.
Moreover, mechanisms to reduce poverty and protect
vulnerable groups from accelerated transformation must be
put in place. The development needs of Cambodia have shifted
from survival mode to a medium term strategic framework for
rapid adjustment and growth supported by sound macro and
sectorial policies, and complementary public investment and
technical assistance programs.

Adjustment and growth, such are the
objectives pursued by the MEF. It is important to strengthen
the macroeconomic balances in order to allow for the
healthy, sustainable growth of the economy. On this basis,
sector-driven strategies tended to increase and diversify
production, parallel with the budget strategy of reducing
financial dependence and encouraging social progress.

The path covered in five years (1994-98),
albeit one that shows deficiencies to be corrected and
delays to be resolved, seems satisfactory, overall. Progress
has been noteworthy and the results indicators positive
mainly due to a good concurrence of external factors
affecting economic development, and also to the clear
direction given by national policies.

Results Indicators - Positive
Development

The outcomes of the results indicators
appears to be positive, according to the information in
Table below:

I.
A real average annual growth rate of 5.2% for the period.
Had it not been for the downturn in 1997 which will continue
to make be felt to a lesser extent in 1998, the average
annual growth rate could have reached 6.0%. In this regard,
1995 and 1996 have clearly very high scores, which were
lining Cambodia up among the Asian dragons until the recent
crisis occurred;

2.
A per capita GDP on a constant growth curve, from US$241 in
1994 to US$303 in 1996, with a slight decline in 1997
($290.9);

3.
A CPI that broke free from the soaring increases of the
previous years to stabilize from 1996 onwards at a about
9%;

4.
A deficit in t he current balance excluding transfers, which
is sustained at 14-15% of GDP, despite the. increase in
imports due to investments;

5.
Foreign exchange reserves that reached over two months of
goods and services imports;

6.
Foreign contributions that covered the gross deficit of the
current balance on an annual average for 1994-97, in the
amount of 134%, with the surplus helping to improve the
gross foreign exchange reserves.

External Factors and the Funding or
Deficits

Factors external to the evolution of the
economy are related to official transfers such as donations,
capital transfers in the form of loans from international
organizations and, lastly, to foreign direct investments
(FDI). The aggregate of such external contributions covered,
on a annual average from 1994-97, the gross deficit of the
current balance in the amount of 134% (the surplus
contributed to the improvement of the gross foreign exchange
reserves to cover 2.7 months of imports in 1997). However,
although official transfers and capital transfers are being
maintained from one year to the next, about 8-

1
1 % and from 2-3 % respectively of GDP, these did drop in
1997 by about 8 % with relation to the initial forecasts and
by 20% compared to 1996. On the other hand ' FDI that had
grown at a very sustained pace since 1093, dropped by 21% in
1997 with relation to the forecasts. There is reason to fear
that, in view of the Asian financial cataclysm, such
investments will not rapidly pick up the dynamic growth that
they experienced up till now.

National Policies and Economic Development -
Budget and Monetary Policies.

Expansion of the monetary supply was strong
during the years 1994-97, with an annual average rate of
35.7%, and for an average 5.2% of GDP. However, no monetary
financing of the Treasury was undertaken with -the National
Bank of Cambodia until late 1997. In reality, the foreign
currency deposit component explains this growth; liquidity
in Riels has grown at an annual average rate of 13.7%.
Still, this development is especially due to the exceptional
year in 1997 (+33.4%). Nevertheless, the Riel-US Dollar
parity has remained very stable during the period, i.e. at
the end of the period 2,593 in 1994; 2,560 in 1995; and
2,720 in 1996. It was only during the second half of 1997
that, suffering the effects of the Asian monetary cataclysm,
the Riel went up to 3,500 for US$I; since that time, it has
basically maintained itself at this level.

However, a good macroeconomic performance
was obvious in the – liberalization of the rate of exchange,
the stabilization of inflation to a tolerable level, and the
revamping of the commercial framework (removal of
restrictions on imports and obstacles to exports).

The Government undertook the renovation and
reinforcement of a taxation and duty system that was still
in infancy. The country was slowing getting away from a
command economy. The option was made for a modern,
performing tax system, but by means of a progressive
approach that would allow for reasonable time for the new
economic structures to adapt and for State employees to be
trained. With the year 1998-after the Taxation Code of
February 1997, pending enforcement of the VAT on large
commercial enterprises in 1999, and with the Customs Code
yet to come out-the Cambodian approach will be five years
old.

The current nomenclature of é taxes
and duties is a good reflection of the tax structure as it
is found in most countries in the world. An analysis of the
relationship between tax revenue and the components of GDP
that are the basis thereof gives rise to the following
observations:

What is called the tax ratio and which means
the actual levy made on GDP, experienced a rapid increase
between 1993 (4.32%) and 1994 (5.95%), when the initial tax
measures kicked in. Since that time, the tax ratio continues
to be around 6% -- with a peak of 6.46% reached in 1997 --
the lowest rate in the world, even compared to the Least
Developed Countries (LDCs). In the Southeast Asian region,
the tax ratio rate was already 9.53% in 1984 in the
Philippines; 14.34% in Thailand; 1 26.93% in Indonesia;
21.53% in Malaysia. the Philippines is the only country
where the rates appear relatively low-, although the rate
quickly increased to 15.5 1 % in 1992. That is about the
same rate as in Vietnam (I 5.4% in 1993 for a GDP per capita
that is lower than that of Cambodia), while Laos was at 7.4%
in 1991.

*
43% to 46% of GDP is not subject to taxation due to the
rightful exemption of agricultural production;

*
When only the potentially taxable GDP is considered, the
average tax rate of national production barely reaches,8%
(from 7.63-7.95% depending on the year);

*
Internal taxation, aside from customs duties, remains weak,
if not negligible; income- profit taxes carried over to the
potentially taxable GDP is less than 1% (0.36 - 0.77%,
except for 1998 which is forecast for 1.23 ˜%). At the same
time, the ratio between domestic indirect taxes and
potentially taxable GDP is barely above 1% (0.59 - 1.36%
depending on the year);

* The average rate of tax on imports
remains at a very reasonable level (IO - 13 % on total
imports);

* Private consumption that supports
both the domestic indirect and import taxes is only a very
small contributor to taxation, between 7 - 8% -- whereas in
all the countries of the world this is the main source of
tax receipts.

BRIEF FACT ON THE INDUSTRIAL
SECTOR

Growth and Transformation during the
Transition

The objectives of policy will be to support
the emergence of internationally competitive industries and
complete the structural reform process. Major reforms
affecting the industrial sector have been undertaken and
others remain to be completed. The Government is committed
to their completion through efficient sequencing so that
competitive private industry can fully emerge from the
transition.

As
a result of structural reform and improved economic
performance the GDP share of trade and industry has risen
from 1 1.5 percent in 1990 to 17 percent in 1996. This
growth has been driven largely by the construction sector as
industry and manufacturing have not expanded at the same
rate due to the slower emergence of private enterprises and
reduced activities of state owned enterprises. However,
manufacturing is developing rapidly with a growth rate of
7.4 percent in 1995 and 7.8 percent in 1996. This sustained
growth is being largely driven by the recently established
export oriented garments industry. Manufacturing
establishments are small in scale with only 6 percent
employing more than 20 persons. Larger scale establishments
are concentrated in and around Phnom Penh with limited
manufacturing activities in rural and provincial areas . The
services share of GDP has increased from 38 percent in 1990
to 41.1 percent in 1996. The banking, insurance and real
estate sub-sectors largely non-operational before 1991 have
also experienced significant growth. Trade has grown
approximately 7 percent per year since 1991 and the tourism
and hotel industry continues to expand rapidly with a growth
rate of 16.9 percent and 25.3 percent for 1995 and 1996
respectively. As a result of the better availability of
infrastructure in the urban areas of Phnom Penh and
Sihanoukville the growth of industry, commerce and services
has occurred largely in those areas. This has contributed to
the widening of the income gap between the 'urban centers
and the rural areas where 85 percent of the country's
population resides. Of significance is the prevalence of the
informal sector, small enterprise trade and services, which
not only employs a large labor force, but their family
business orientation provides easier access for wider
participation by women.

Foreign Investment

Foreign investment trends are encouraging.
Joint ventures and foreign direct investment totaled over
$2.2 billion in commitments from mid-1994 to mid-1996 with a
projected employment potential of 60,000. Main areas of
investment include the textile and garment industry,
construction and tourism. More than 60 per cent of foreign
direct investment has been in light industry and services
during the period. These estimates while indicative show
that the emphasis of foreign investment is on light industry
and services which indicates that industry policy needs to
be focused to the needs of the fastest growing sectors. More
investments in manufacturing activities are now taking
advantage of special trading rights under Most Favored
Nation and the Generalized System of Preferences now
extended to Cambodia by many industrialized
countries.

Oil and Gas

Cambodia i s dependent on imports for all
its oil supplies, which will continue in the foreseeable
future. Initial results from private sector exploration
which restarted in 1991 offer promise of vast untapped
off-shore oil and gas reserves in the economic zone of the
country. Oil and gas exploration rights are currently
negotiated on a case by case basis. The Government will end
this ad hoc approach and with external assistance implement
an open tender system based on a moaei contract agreement.
Expanded licensing of blocks of off-shore exploration areas
using transparent bidding processes is being undertaken
based on surveys commissioned to assess the availability of
in-land fossil fuel deposits in the Mekong basin and the
Tonle Sap. Agreements have been designed to provide
incentives and protection to the investor, while ensuring
that the national benefits of potential oil and gas
operations is captured for use in the funding of Government
development programs. A model petroleum agreement and a new
Mineral Law have been prepared with a proper legislative
framework being developed to achieve a fair policy governing
exploration and exploitation of petroleum and mineral
resources along international standards.

BRIEF FACT ON THE AGRICULTURAL
SECTOR

The agriculture sector contributes about 45
percent of GDP and provides direct employment to nearly 80
percent of the labor force. As 85 percent of the population
live in rural communities and 75 percent of the poor are
farmer headed households the key to sustained economic
growth, poverty alleviation and development of the rural
economy is agriculture.

In
recent years the sector has undergone a number of reforms
reflecting the move from state responsibility for production
to market based agriculture. The introduction of economic
reform resulted in the formal abandonment of collectivized
agriculture and the redistribution of land based on private
holdings with farmers given permanent rights to land use and
inheritance. The 1992 Land Law advanced this process by
prescribing types of land tenure: private property for
housing plots, possession for agricultural land under 5 ha.
permitting inheritance, but not sale; and, concession for
larger agricultural plots with no legal right to
inheritance, lease and sale. Accompanying land reform has
been price liberalization and the adoption of legislation to
permit joint ventures between the state and foreign
investors.

Rice production

Production of rice contributes 15 percent of
GDP and accounts for nearly 90 percent of the
available cultivated land area. Yields remain low, however,
at about 1.64 metric tones per hectare (Mt./ha.), which
compares unfavorably with Thailand (2.1 Mt/ha.), Philippines
(2.7 Mt/ha.) and Vietnam (3.2 Mt/ha.). The target is for an
average yield of 2.0 Mt./ha. by the end of the decade.
Government efforts to increase rice production is producing
beneficial results in that production for 1995 was 2,057
million Mt. or an increase of 30 percent on the average of
the last 5 years. Total rice production for 1996 was more
than 3.6 million Mt. The introduction of new seeds and
production techniques contributed to the increase in output.
However, rice yields in Cambodia will always be subject to
variation due to the greater reliance of production systems
on a seasonal monsoon weather regime in contrast to rice
production based on irrigation' As such, the Government will
maintain open access for rice exports and disseminate proven
technology to improve crop practices and management of soil
and water resources.

Rubber

The most important opportunity for
developing commercial crop production lies in the rubber
industry. The 1995 level of production and export of rubber
of 40,000 Mt. is only just over a quarter of the volume in
1967. There is scope for increasing the cultivated area from
the current area of 61,000 ha. to about 330,000 ha. without
reducing the planting area for other crops, resulting in
anticipated yields of about 500,000 Mt. of dry rubber per
annum. In the short term, the rehabilitation of existing
plantations will increase overall yields. Privatization of
the six state owned plantations is being currently prepared,
with valuation of assets underway, which will raise private
investment and expertise necessary to increase coverage and
modernize production. Small holder and farmer owned and
managed private plantations will also be encouraged around
nucleus plantations. Moreover, rubber production is a
labor-intensive crop and the industry has the potential to
perform a significant poverty alleviation role through rural
employment creation.

Fisheries

The fisheries sub-sector accounts for 3.4
percent of GDP relative to livestock and has the potential
to increase its contribution to economic growth. The
priorities in the fisheries sector are to maintain per
capita consumption and to increase incomes through greater
value added activities, such as commercial shrimp fanning
for export, while preserving habitat and maintaining the
absorptive and regenerative capacities of the marine
environment. Due to resource limitations and the need to
avoid over-exploitation anticipated yields by 2000 would
rise to only 153 Mt. (68,000 inland, 35,000 marine, 13,000
aquaculture) from the current level of about 1 42,000
Mt.

Forestry Management

Forests constitute a major national asset
with 60 percent of the land being estimated as forested. In
the last twenty years, high value evergreen forest has been
reduced by about 30 percent and replaced by re-growth or
secondary forest. Forestry management problems arise because
of an inability to accurately analyze applications for
concessions, poor security and lack of effective
enforcement. The Government is currently introducing
measures for more effective control over illegal logging
activities and for full market pricing in logging
concessions. At present investors pay a very low price for
logging concessions in Cambodia compared to the
international standard. Revenues derived from auctions and
normal forest management (taxes and royalties collection)
will continue to flow to the budget. No n tax revenues to
the national budget from logging operations amounted to
$21.6 million in 1995 $27.5 million in 1996 with a minimum
of $26 million anticipated for 1997. In addition, a system
for improved monitoring of logging practices and the strict
enforcement of more sustainable harvesting practices is
being implemented to bring uncontrolled and illegal logging
into a coherent policy and institutional framework.

BRIEF FACT ON THE TELECOMMUNICATIONS
SECTOR

Reliable and efficient communications and
regular dissemination of information is essential for the
working of competitive markets and to keep the nation
informed to the fullest extent about domestic, regional and
international events. Cambodia has a great need to maintain
and expand communications and in formation services if it is
to achieve its economic growth targets.

The sectoral goal for telecommunications is
to establish an efficient commercial low cost
telecommunications network of adequate capacity and coverage
in line with the Master Plan together with an efficient
public postal service and public broadcast network.

As one of
the poorest countries in the region, international
assistance remains a vital component in overcoming the
challenges faced in Cambodia's development. Nonetheless,
private sector investment will become increasingly important
for the country as the private sector assumes its position
as the main engine for economic growth in Cambodia. To this
end, the Royal Government of Cambodia sees private sector
investment as integral to the development of a fully
democratic and prosperous Cambodia in the years
ahead.

The
government is fully aware that if the country is to achieve
its developmental goals, it cannot rely on foreign aid and
assistance indefinitely, and that real economic growth and
development lie in the private sector. Consequently, a
programme of reform is now being undertaken by the
government in order to create a conducive environment for
private sector investment. In 1994, the Law on Investment of
the Kingdom of Cambodia was passed with the aim of
streamlining the foreign investment regime and providing
generous and competitive concessions for direct private
sector investment. The Law on Investment also created the
Council for the Development of Cambodia (CDC), a one-stop
service Organisation for investment in Cambodia. The CDC,
through the executive arm of the Cambodian Investment Board
(CIB), is now responsible for the processing of applications
for investment projects and is required to give a decision
within 45 days of submission. As such, the government is
fully committed to the speeding-up of new investment-project
approvals by making the CDC a truly effective and
well-disposed one-stop service.

2. SUMMARY OF FOREIGN INVESTMENT
POLICY

In order to
attract FDI, the government has strengthened the country's
legal framework, bolstered its institutions and liberalised
the relevant regulations, in ways that are conducive to
private sector investment and business activities in
Cambodia. The 1994 Law on Investment provides similar
treatment to foreign and domestic investors alike, with the
exception of the issue of land ownership, as set forth in
Cambodia's constitution. Even in this area, the regulations
are generous, with foreign investors able to lease land for
a period of up to 70 years, with the possibility of renewal
thereafter.

The
government provides investors with a guarantee neither to
nationalise foreign-owned assets, nor to establish price
controls on goods produced and services rendered by
investors, and to grant them the right to freely repatriate
capital, interest and other financial obligations.

Investors
can set up 100% foreign-owned investment projects and employ
skilled workers from overseas, in cases where these workers
cannot be found in the domestic labourforce.

In addition,
the Law on Investment and its related Sub-Decree grant
generous incentives to investors, especially those concerned
in investment projects geared towards exports.

Attention is
also accorded to private investment in
Build-Operate-Transfer (BOT) projects, and private
investment in infrastructure, including public utilities
such as electricity, water supply and
telecommunications.

In order to
facilitate investors in their applications for investment
approval, the government has established an institution to
oversee investment policy and strategy called the Council
for the Development of Cambodia (CDC) . The CDC, being the
highest decision-making level of the government on private
(CIB) and public (CRDB) investments, is chaired by the prime
minister and composed of senior ministers from related
government ministries.

The
Cambodian Investment Board (CIB), the operational arm of the
CDC, has been designated as the etat major and one-stop
service of the government, responsible for the evaluation of
investment proposals and projects from all investors, both
individual and corporate.

Cambodia has
obtained "Generalized System of Preferences (GSP)" and "Most
Favored Nation (MFN)" status from its major trading
partners, including the European Union, the USA, Japan,
Canada and Australia.

Apart from
facilitation and support at the national level, attention is
also being given by the government to opening up access to
international sources of finance for private sector
investment. Cambodia is already a member of the IFC and
MIGA, and is currently applying for membership to the ICSID
(International Center for Settlement of Investment
Disputes). It has also signed agreements with the ADB,
providing private sector investors with the opportunity to
obtain funding for their investment projects from this
international financing institution.

Labour
Policies

Labour Force

Cambodia's
low labour costs are attractive to foreign investors. About
45% of Cambodia's population of 11.7 million is of working
age, while over 60% of the workforce comprises women. The
minimum wage rate for unskilled workers is currently around
US$45 per month .

1.
ALIEN EMPLOYEES

Investors
has permitted to bring into Cambodia foreign nationals who
are:

- Qualified
managerial personnel

- Technical
personnel

- Skilled
workers

A Law on
Immigration was passed by the National Assembly on 26 August
1994. According to Article 28 of the Law, foreigners who
have already received a "letter of investment approval" from
the CDC, will be allowed to stay in Cambodia, together with
their families, for a period stated in the letters of
investment approval.

2.
RELEVANT LABOUR LAW

A Labour Law
was adopted on 10 January 1997 by the National Assembly.
This Law, which contains 396 articles. lays down general
working conditions and other related matters, such
as: